Liquidity in Cryptocurrency Market and Commonalities across Anomalies
31 Pages Posted: 23 Apr 2020 Last revised: 1 Sep 2021
Date Written: August 31, 2021
We examine how liquidity affects cryptocurrency market efficiency and study commonalities in anomaly performance in cryptocurrency market. Based on the unique features of cryptocurrencies, we build a model with anonymous traders valuing cryptocurrencies as payments for goods and investment assets, and find that decreases in funding liquidity translate into lower asset liquidity in the cryptocurrency market. Empirically, we observe that many widely recognized stock market anomalies also exist in the cryptocurrency market, though some have opposite long/short legs. We also find supportive evidence that a decrease in cryptocurrency liquidity enhances anomaly returns while preventing the cryptocurrency market from achieving efficiency.
Keywords: Cryptocurrency, Asset Liquidity, Funding Liquidity, Anomalies
JEL Classification: G11, G14
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